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With a controversial change to rule 102(e), the SEC lays down a stricter definition of improper professional conduct.

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SEC Lowers the Boom

L ast month, the Journal reported how SEC
Chairman Arthur Levitt laid down the law for public accounting firms,
their clients and the audit committees. (See
Arthur Levitt Addresses Illusions ,' JofA, Dec.98.) However,
the SEC wasn't finished. With a controversial regulatory change, the
commission has become as strict with individual CPAs as with the firms
and companies they work for. A proposed clarification to help judge
when CPAs have crossed the line has generated enough response from the
financial community and additional guidance to fill a file folder to
overflowing.

The change had its genesis in June 1998 when the SEC took a new
look at rule 102(e) of its Rules of Practice. Sparking the
reexamination was a finding by the U.S. Court of Appeals for the
District of Columbia Circuit, in Checkosky v. SEC
, that the SEC had not properly defined improper professional
conduct. In response, the commission proposed an amendment to clarify
the term, noting in a June memo that negligent conduct could be
considered improper professional conduct in certain circumstances.

Define your terms The AICPA was hit hard by the
phrase negligent conduct. It responded with a comment letter 17 pages
long (not including the footnotes) that said that the negligence
provision is not a reasonable and direct adjunct to the Commission's
express powers.Indeed, [it] potentially reaches conduct that the
Commission lacks power to sanction. The Institute also wrote a letter
to its business and industry executive committee and the SECPS
executive committee saying, it does not believe that a single act of
simple negligencewhich the proposed amendment may well be interpreted
to encompassshould ever constitute improper professional conduct' for
purposes of rule 102(e).

After receiving more than 150 comment letters, the SEC issued a
final rule with the clauses on negligent conduct left in. The final
language lists two types of such conduct:

A single instance of highly unreasonable conduct that
results in a violation of applicable professional standards in
circumstances in which an accountant knows, or should know, that
heightened scrutiny is warranted.

Repeated instances of unreasonable conduct, each resulting in a
violation of applicable professional standards, that indicate a lack
of competence to practice before the commission.

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